NEW YORK/LOS ANGELES
(Reuters) - Shocked by the rapid adoption of a new
$84,000 hepatitis C treatment, U.S. health insurers are
trying to make sure they aren’t blindsided by other
drugs being developed and are looking for ways to limit
their use from the day they are launched.

Manufacturer Gilead Sciences Inc GILD.O says 30,000 people have
received hepatitis drug Sovaldi so far, and that sales hit a
record-breaking $2.3 billion within a few months. The treatment,
typically 84 pills taken over 12 weeks, completely cures the disease
in more than 90 percent of patients.

As many as 3.2 million Americans are infected by hepatitis C, and
the cost of giving most of them Sovaldi would surpass $200 billion.
Some insurers have already put conditions on who can get the drug,
and states including California and Texas have slowed or put
treatment on hold while they study what to do.

Insurers warned that these unforeseen costs will cut 2014 earnings
and require rate hikes. Now, at industry conferences, in
conversations with investors, and in private, they are pushing
Gilead’s rivals, a group that includes AbbVie Inc, Merck & Co and
Bristol-Myers Squibb Co, to discount their own new hepatitis C
treatments when they come to market starting this fall. Such a
high-profile campaign by insurers before drugs are even approved is
new.

They are also signaling they will restrict who can get coverage for
new cholesterol drugs being developed by Amgen Inc AMGN.O, Pfizer
Inc PFE.N and a partnership of Regeneron Pharmaceuticals Inc and
Sanofi SA.

By law, insurers cannot deny access to new drugs if they represent a
real improvement for patients, leaving drug companies with the upper
hand in most price discussions. When comparable competitors, or a
generic version is on the market about a decade later, insurers have
room to steer patients away from the new drugs, and pharmaceutical
companies cut prices steeply and give big discounts.

But insurers have not faced such a highly effective drug aimed at a
widespread disease that is so expensive and so quickly adopted. The
previous record for a drug reaching blockbuster status was set in
2011, when hepatitis C therapy Incivek from Vertex Pharmaceuticals
raked in $1.56 billion for the entire year. Sovaldi has sold more in
a quarter of the time.

As a result, insurers are taking a harder line on which patients
should get Sovaldi, based on the drug’s clinical data.

Sovaldi is “game-changing” for insurers thinking said John Whang,
president of Intelligence Reimbursement, a consulting firm that
helps pharmaceutical companies set prices. The only way for them to
respond is to control the volume of treatment used, he said.

PUBLIC SHAMING

In a sign of how serious the industry has become, the largest
insurer lobby group last week took Gilead to task at a public
conference.

“The company in this case is asking for a blank check and you can’t
give anyone anymore a blank check because it will blow up family
budgets, state Medicaid budgets, employer costs and wreak havoc on
the federal debt," said Karen Ignagni, president of America’s Health
Insurance Plans.

Gilead argues that Sovaldi’s price is worth it, since it will
replace even costlier spending on hospital visits and treatments for
cirrhosis or liver failure. It has not budged on price for the
hepatitis C drug, although Gregg Alton, Gilead's executive vice
president for corporate and medical affairs, acknowledged that
insurers are going to start negotiating.

U.S. drug spending reached a record $329 billion in 2013, driven by
a double-digit increase in prices for new cancer, HIV and hepatitis
C therapies. Express Scripts, the nation’s largest pharmacy benefit
manager, expects spending on such specialty drugs to rise an
additional 63 percent from 2014 to 2016, driven by an 1,800 percent
increase in hepatitis C drug costs.

Successful drugs can cost $1 billion to bring to market, including
spending on research, development and marketing. Supporters of drug
companies say big advances necessitate high prices.

"We are the only country in the world that pays exorbitant prices to
provide innovation first here, but that's what we need and that's
what the American people have come to expect," said Richard Burr, a
Republican Senator from North Carolina who has spent decades working
on bipartisan health bills.

LIMITING USE

Hepatitis C complications can take years to develop, which gives
insurers and government health agencies leeway to determine when
treatment should start.

Many insurers, which manage most of the 150 million people covered
by employer-based plans as well as some government Medicare and
Medicaid plans, require patients to get authorization before using
Sovaldi. Some limit the drug to patients with a certain genetic type
of the disease.

Express Scripts has been pushing for all but the sickest patients to
wait for new therapies that are expected to compete head-to-head
with Sovaldi late this year. It is also pressing rival manufacturers
for low prices, hoping to avoid the shock of Sovaldi, which sped
through trials and regulatory approval and caught insurers by
surprise.

"In this particular case there was very little discussion
pre-launch. But other companies are now already discussing potential
future price points in response," said Steve Miller, Express Scripts
Chief Medical Officer.

AbbVie and Merck both declined to comment on whether discussions
with insurers about their new drugs were underway.

Gilead, which says it discussed the Sovaldi launch with insurers, is
in talks over which patients should be treated with its next
hepatitis C pill. That will be a two-drug combination that will
eliminate the need for a companion drug that nearly doubles
Sovaldi’s current total cost.

Industry analysts expect the company will price it closer to
Sovaldi’s $84,000 than to the $150,000 cost of a combination of
Sovaldi and a Johnson & Johnson JNJ.N drug that some doctors
prescribe.

Mick Kolassa, chairman of pricing consultancy Medical Marketing
Economics, in Oxford, Mississippi, who advises pharma companies,
says insurers are being aggressive. “We are seeing some of them step
up and flex their muscles,” he said.

CHOLESTEROL DRUGS IN SIGHT

More scrutiny of new pricing is likely ahead as the country comes to
terms with how it should pay for expensive drugs, according to John
Castellani, Chief Executive Officer of leading drug industry lobby
group Pharmaceutical Research and Manufacturers of America or PhRMA.

Sovaldi has shown that patients are bearing too much of the drug's
costs because of rising co-payments, co-insurance and deductibles,
he told Reuters, laying the blame on factors controlled by insurance
companies.

But patient advocates are not choosing sides yet, which may have the
effect of giving insurers room for action.

“I think the fault lies with both the for-profit insurers and the
drug companies," said Anne Donnelly, director of healthcare policy
at the San Francisco-based Project Inform, which advocates for
hepatitis C patients. The system has not changed to reflect the
impact of new effective, expensive drugs, she said.

The next big price battle centers on a new class of cholesterol
drugs known as PCSK9 inhibitors, which help the liver to clear “bad”
LDL cholesterol from the blood.

Large-scale studies show the new drugs can help patients who cannot
tolerate, or get enough benefit from, the most widely-used
cholesterol drugs, statins. The PCSK9 therapies are expected to cost
thousands of dollars a year, far above the price of statins sold as
generics.

Drugmakers are expected to push for the new medicines to be used by
7 million to 20 million people, or up to 30 percent of the 71
million Americans with high cholesterol. Insurers already are
questioning whether the estimates of use are legitimate.

“There is really no need to take these new medications and spread
them out across a larger community of people who will respond to
existing treatments, many of which are generic,” Aetna Inc’s AET.N
National Medical Director for Pharmacy Policy Ed Pezalla said in an
interview.